Service sector SMEs could be hit by cuts in mini budget: Economist

Small- and medium-sized enterprises providing services to Government departments could be hurt by budget cuts expected to be unveiled in the upcoming mid-year budget review, an economist says, but renewed emphasis on fiscal policy should help sectors stung by the strong Aussie dollar.

According to the Australian Financial Review, the expenditure review committee has just signed off on cuts discussed for months and recommended by Finance, Treasury and Prime Minister and Cabinet.

The cuts, expected to be revealed this month, will be the first major savings cuts in a mini-budget for more than 20 years.

Sources told the paper the cuts needed to be locked in for the 2012-13 year now, rather than wait for the Budget in May next year.

It’s reported that longer-term savings in health, welfare, education and defence have been found, with over-claiming by dentists, aged care accommodation, and the pharmaceutical industry said to be targeted.

James McIntyre, senior economist at Commonwealth Bank of Australia, says the cuts could have a “sharp impact on SMEs that are supplying services to Government”.

“The white-collar supplier impact could be somewhat negative, particularly when others are cutting back [in the private sector],” McIntyre says.

McIntyre says although the cuts could result in weakness feeding through the economy, on the other hand, the impact of returning to surplus on public confidence could be underestimated. 

“On a pure economic level, it doesn’t matter if there’s a surplus or deficit of a few billion dollars,” he says.

“But it’s similar to not having two consecutive negatives quarters of negative growth.”

Furthermore, returning the budget to surplus could leave the Government with more ammunition should more troubles brew in Europe, he says.

McIntyre says a Government pullback on spending would also allow the Reserve Bank to cut rates, which would help sectors such as tourism and manufacturers that have been hurt by the strong Aussie dollar.

“While the Government cuts might hurt white-collar sectors, lower interest rates could take pressure off highly labour-intensive sectors that are suffering, such as manufacturing and tourism,” McIntyre says.

He added it was interesting to hear the Government speak overseas about how they were willing to inject further stimulus if needed and then come back to hold the surplus promise as “sacrosanct”.

The flagged cuts comes amid slowing company receipts as business reacts to the turmoil in the US and Europe, and calls to plug the Government’s spending commitments, such as the carbon tax compensation package and last week’s promise to put aside $2 billion to help fund pay increases for low-paid workers in community and social work.

Treasurer Wayne Swan says since the start of the GFC, $130 billion in revenue has been written down, and this will make the task of returning the budget to surplus a lot tougher.

“The hit to Government revenues caused by the global turbulence means we’ll have to continue making tough budget decisions,” Swan said at the weekend.